Variable overhead efficiency variance

Variable overhead efficiency variance is the difference between actual hours worked at standard rate and standard hours allowed at standard rate. The standard hours allowed means standard hours allowed for actual output or production during a particular period.

Variable overhead efficiency variance would be favorable if actual hours worked are less than the standard hours allowed and unfavorable if actual hours worked are more than the standard hours allowed for actual output or production during the period.

Formula

The formula of variable overhead efficiency variance is given below:

Variable overhead efficiency variance = (Actual hours worked × Standard rate) – (Standard hours allowed × Standard rate)

The formula can also be written in factored form as follows:

Variable overhead efficiency variance = SR × (AH – SH)

Where;

• SR = Standard variable manufacturing overhead rate (also known as variable portion of predetermined overhead rate)
• AH = Actual hours worked during the period
• SH = Standard hours allowed for actual output or production

Example

The Peterson Corporation provides you the following information for the month of January 2018:

• Budgeted variable manufacturing overhead: $200,000
• Budgeted hours: 10,000 hours
• Standard variable manufacturing overhead rate: $20 per hour (= $200,000/10,000 hours)
• Standard time per unit: 2 hours
• Actual hours worked: 9,500 hours
• Actual units produced: 4,500 units

Required: Compute variable overhead efficiency variance for the month of January 2018.

Variable overhead efficiency variance = (Actual hours worked × Standard rate) – (Standard hours allowed × Standard rate)
= (9,500 hours × $20) – (*9,000 hours × $20)
= $190,000 – $180,000
= $10,000 Unfavorable

* 4500 units × 2 hours per unit

Or

Variable overhead efficiency variance = SR × (AH – SH)
= $20 × (9,500 hours – 9,000 hours)
= $20 × 500 hours
= $10,000 Unfavorable

The variable overhead efficiency variance of Peterson Corporation is $10,000 unfavorable because actual hours worked were more than the standard hours allowed to produce 4,500 units during the month.

Causes of variable overhead efficiency variance

Causes of favorable variance

A favorable variable overhead efficiency variance may occur due to one or more of the following reasons:

1. Replacement of less efficient machine with a more efficient one which is capable of reducing the time required to manufacture a unit of product.
2. Employment of highly skilled, more efficient and motivated workers.
3. Introduction of a performance based remuneration.
4. Use of such raw material that is easy to handle and transform into finished product.
5. Inefficient standards and budgets.

Causes of unfavorable variance

An unfavorable variable overhead efficiency variance may be the result of one or more of the following reasons:

1. Use of substandard or low quality raw material that is difficult to process or convert into finished product.
2. Decline in the efficiency of manufacturing machines because of continuous use or wear and tear.
3. Employment of less efficient or poorly motivated workers.
4. Errors in setting standards and budgets.

Who is responsible of the variance?

Generally, the production department is considered responsible for any unfavorable variable overhead efficiency variance.

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